Oil price fall: the winners, losers and how to profit

Over the past couple of months the oil price has tanked, with the "Brent crude" benchmark falling by more than 30pc since the summer, from $116 a barrel in June to a five-year low of $67.50 on Monday.

A falling oil price affects the economy and investors in various ways. For example, many businesses see their costs fall, boosting profits, but oil firms, naturally enough, see their earnings fall.

Here we look at who stands to win and lose from falling crude prices. We also examine the various ways in which investors can profit if they believe that oil will recover.

Surely a lower oil price is a good thing?

The fall is welcomed by consumers as a lower oil price translates to cheaper petrol at the pump.

Britain’s economy also stands to benefit. A lower oil price usually keeps the brakes on inflation, which stood at 1.3pc in October.

Low inflation is considered good news for economic growth as consumers’ wages go further.

Who loses out when the oil price falls?

When the price falls the oil and gas companies, such as Royal Dutch Shell and BP, generate less money and may have to cut their dividends.

Russ Mould of AJ Bell Youinvest, the fund shop, said: “The big worry is that the oil companies will turn off the dividend tap. When less money is coming in, companies want to keep hold of it and become less willing to reward shareholders with dividend payments."

Even if you do not own any oil shares directly, there is a good chance that your Isa or pension has some exposure to these firms. Oil and gas groups make up 15pc of the FTSE 100 index, so whether you invest in British shares via a "tracker" fund or use an active fund manager, the oil price fall may well have hit your investment returns.

But do not panic...

Dividend cuts are not imminent. The consensus view among analysts is that for oil companies to start cutting their dividends the price of crude will have to remain below $70 for several months.

Mr Mould said: "Royal Dutch Shell has not cut its dividend since at least 1945 so no one is expecting any bad news on the payout there. Both Shell and BP had already begun to slash costs and sell assets as part of a programme to focus more on shareholder returns before the oil price slump, so there should not be any immediate downward pressure on dividends."

And cheap-looking shares are emerging. Investors can now buy oil or mining companies at a much lower price than they could have six months ago. Mr Mould said “brave” investors buying today could profit as long as the oil price stabilised from here.

The other big loser: Russia

But arguably the biggest losers are the oil-producing nations – so much so that Russia’s currency has been sent into freefall and a recession seems inevitable. This will hit investors in funds that hold Russian shares.

The winning shares from the falling oil price

Many firms benefit when the oil price falls, especially if there is a knock-on effect on electricity prices. Heavy users of energy or fuel see their costs fall and profit margins rise.

For example, the price of aviation fuel is closely linked to oil, so airlines including easyJet and Ryanair have seen their shares soar over the past three months, by 22pc and 19pc respectively.

How can private investors play the oil price

For those who believe the oil price has hit the bottom and can only bounce back from here, the easiest way to invest is to buy an oil exchange-traded fund (ETF).

These funds track the movements of either the oil price or oil companies. But bear in mind that investing in any commodity, including oil, is extremely risky.

The ETF Securities Brent 1mth EFT, which trades on the stock market under the ticker symbol OILB, is designed to track the oil price. The annual cost is 0.49pc.

Adam Laird of Hargreaves Lansdown, the fund shop, tipped the Amundi MSCI Europe Energy and iShares Oil & Gas Exploration & Production ETFs.

“The Amundi fund tracks 20 European energy companies and has a low charge at 0.25pc. The iShares product tracks 109 global firms, but has a higher charge of 0.55pc,” Mr Laird said.

There are a small number of “active” funds that specialise in oil. These include the Junior Oils Trust and New City Energy, an investment trust. But these are risky plays and have poor recent performance records.

Brian Dennehy of Fundexpert.co.uk, the analyst, said a better way to play the oil price fall was to boost exposure to an “energy-intensive” Asian economy.

“It acts like a tax cut for countries such as India, China and Japan,” he said.